You could be forgiven for not understanding the term leverage and the concept of leveraged finance investment methods. This is not your basic, entry level form of investing for most Americans. The impressive truth about leveraged finance methods is that if you do them successfully, you can make a tremendous amount of money, often in a short amount of time. To learn more about this completely legal and ethical means of making money, read on with an open mind.
What is Leverage Anyway?
Leverage is using borrowed money or financial instruments in order to boost the possible gains from an investment. Such leverage is easily able to be built up using options, futures, margin on stocks, and FX Foreign Exchange. It is most typically utilized by regular people when they take out a mortgage to buy a home or piece of property.
What Are Some Smart Investments Where You Can Effectively Use Leverage?
There are a number of investments where leverage is a possibility and a sound idea. These include Options, Futures, Stock on Margin, Real Estate purchases, and FX Foreign Exchange. Each of these topics will be briefly addressed in the following paragraphs.
Simply put, options are the means of controlling 100 shares of stock or some commodity with a small amount of money invested. As an example, with a thousand dollars that you wish to invest, you might buy ten shares of Microsoft Corporation’s stock, or you might instead buy five options contracts on Microsoft stock. This would give you control over five hundred shares instead of simply ten. You would have the option to buy the shares at a set price, or you could sell the option as it gains in value along the way.
Futures can be made to seem more complicated than they actually are. The easiest way to think of them is as a vehicle that allows you to control and trade commodities like gold or silver ounces, coffee, soybeans, cotton, or timber. With five thousand dollars, you can control around $30,000 in silver ounces. As the price of silver rises, your long contracts gain in value much faster (at six times the rate, in fact) than if you only had five thousand dollars of silver. The downside is true as well. If silver prices decline, your silver position would lose in value at a rate six times faster than if you only had the literal five thousand dollar silver position.
Stocks on Margin
You might also use leverage in your finance and investments with stocks. By opening a margin account at an online broker, you are able to buy between two to three times as much stock as you have actual money in the account. This offers a lesser amount of margin than the other financial instruments allow. It does have the advantage of not losing you money at a shocking rate if your strategy proves to be wrong.
Real Estate via Mortgages
Most Americans who purchase a home will do so without ever realizing that they are using margin, sometimes heavily. If you put down 10%, then you are gaining a ten to one leverage on your new property. With 5% down, it is an impressive twenty to one margin. This is why the housing bubble made so many people millionaires before later blowing them to pieces, as housing prices first skyrocketed then crashed and burned.
FX Foreign Exchange
In terms of leveraged financial investments that are accessible to the everyday, working people, there is nothing that offers the power and eye watering leverage of FX, or Foreign Exchange. It is no exaggeration to say that you can easily get a 100 to 1 or even 200 to 1 leverage rate with foreign currencies. This means that with only one thousand dollars, you can hold a 100,000 or sometimes even 200,000 sized currency pair such as EUR/USD, GBP/USD, or USD/CHF. Tiny movements in your favor will net you dramatic and sometimes instantaneous gains. Similarly, if they move against you, these investments can wipe out your principal in a matter of minutes or even seconds. Nothing is more exciting and potentially life changing than a heavily leveraged investment in FX. Jim Rogers and George Soros became among the riches men on the planet through such investments in GBP/USD in the 1990’s.
There is a company that boasts of even 1000 to 1 leverage in currencies. This is Netotrade. A Netotrade review has called this a scam, but no one has been able to conclusively prove that they are not offering this stratospheric margin and leverage
capability. As always, you should do your due diligence and proceed with caution before you put your hard earned money into anything.